Wednesday, 10 October 2007

Falling exchange rates and rising prices cause alarm across Peru

The Dollar to Nuevo Sol (local Peruvian currency) exchange rate has crashed from 3.15 to 2.96 in the space of days. This means that for every $100 exchanged, people are receiving 19 Nuevo Soles fewer - the equivalent of 19 bus fares or about 4 average restaurant meals. This is extremely worrying for many local businesses who hold bank accounts in dollars and citizens whose monthly wages are paid in dollars.

The Peruvian government recently stated that the dollar has devalued worldwide, not just in Peru, and that therefore there is no reason for concern. This has done little to calm the Peruvian people however; in the 1980’s the current President, Alan Garcia, froze all bank accounts held in dollars!

At the same time, prices are beginning to rise – bread has almost doubled in price over the last few months and other basic food stuffs, such as eggs, have gone up too. What with Alan Garcia back as President, people are worried that they will suffer again the terrible hyperinflation of his 1980’s government, which was worse than that of post Nazi Germany in the late 40’s. People are scared for their savings, their livelihoods and their future.

The devaluation of the dollar and rise in prices has affected The Colour of Hope too – it means that for the near future we will need to spend more to achieve our aims. It also means that the young people we help are even more in need of aid than before – rising prices and falling exchange rates are worrying enough for those who are lucky enough to have jobs; for the unemployed they’re devastating.

1 Leave a Comment:

fidge said...

The dollar is indeed weak worldwide, and food price inflation is indeed a universal phenomenon (there have even been boycotts of pasta in Italy over its increased prices), but that doesn't of course make the situation any less devastating.

The good news is that with the orthodox macroeconomic policy pursued by Alan Garcia, Peru almost certainly won't see the hyperinflation it experienced when he attempted to spend more money than the government had in the 1980s. The bad news is that with stockpiles low worldwide food prices won't get any lower over the next year or two.

Expect the Peruvian government to come under increasing pressure to follow countries such as Argentina, and, most recently Russia, in imposing price caps on food. While this is superficially appealing, it has the perverse effect of increasing scarcity (because shops can't afford to stock goods that they have to sell at a loss) and forcing the government to spend vast amounts of money to keep prices low, which, in the long run, is what would make hyperinflation more likely again.

What is the situation at the moment? Have food prices dropped at all? Are price controls being discussed? Is the government getting the blame? Are Humala or any other populist figures capitalising on the issue?